On the Mortgage Mess, Fannie and Freddie Point Blame Elsewhere

Testifying before the Senate Banking Committee this week, executives at Fannie Mae and Freddie Mac—the two government-controlled mortgage giants—blamed other players in the foreclosure mess, noting that that they’re not responsible for the day-to-day management of mortgage loans but instead rely on banks to do so fairly with borrowers.

Fannie Mae’s executive vice president, Terence Edwards, testified that Fannie pays servicers “an incentive based on the type and number of [loan] modifications they successfully complete.”

“Servicers receive an incentive only if they complete a workout,” he said. “We do not provide any financial incentive to foreclose.”

But according to a piece in the Washington Post in October, Fannie provides its contractors with financial disincentives for delaying foreclosures and sales:

Meanwhile, Fannie Mae imposes a $100 fee on contractors for each day they fail to notify the firm that the foreclosure process was a success and that it has the right to move ahead with the resale of a home. On top of that, Fannie charges a penalty – which escalates for larger mortgages – on contractors who delay selling off such properties.

Fannie declined to comment on these fees. But in a memo to loan servicers dated Aug. 31, Gwen Muse-Evans, Fannie Mae’s chief risk officer, warned mortgage servicers that fees may be imposed based on “the length of the delay and any costs that are directly attributable to the delay.”

Fannie and Freddie, which own more than half the nation’s mortgages, both keep lists of law firms that they’ve pre-approved to handle the foreclosure cases referred by servicers. In recent months, the discovery of botched foreclosure documentation has not only ensnared servicers but also several of these law firms.

As we’ve noted, an ex-employee at one of these foreclosure firms, the Law Offices of David J. Stern, testified in an October that Fannie and Freddie pressured the firm to “pick up the speed” in processing foreclosures. The firm is now a subject of an ongoing investigation by the Florida attorney general’s office, and Fannie and Freddie have since cut ties with it by taking it off the pre-approved lists and instructing servicers not to make referrals to the firm.

Edwards of Fannie Mae told the lawmakers that having the list “allows us to improve our oversight and management of both the servicers and the attorney’s actions during the default process.”

Both Fannie and Freddie executives told the committee that their companies have tried to impose penalties on the banks that originated these loans–for instance, by trying to force them to repurchase delinquent loans that have failed to meet underwriting standards.

But as Bloomberg noted earlier this week, that hasn’t gone so well either. Despite Fannie and Freddie’s requests for banks to buy back $13 billion in loans, banks aren’t repurchasing the loans without a fight, arguing that the two government-supported enterprises are unfairly second-guessing them and blaming loan failures on technical errors.